Initiation of Coverage

April 17, 2009 Equity Research
Consumer
Brazilian Housing Developers
Latin America Cement and Construction
Initiation of Coverage
Guilherme Vilazante Edoardo Biancheri
Fell and then Rose Sharply on Sentiment - Time to BBSA, Sao Paolo BBSA, Sao Paolo
Look at Fundamentals +55 11 5509 3376 +55 11 5509 3348
guilherme.vilazante@barcap.com edoardo.biancheri@barcap.com
Sector View
New: 1-Positive
Old: 0-Not Rated
Summary
Fell and then rose sharply on sentiment: the steep downward motion of Brazilian housing stocks over the last 12 months was
driven by a combination of a difficult credit environment, uncertainty about demand, lack of predictability, and cumbersome and
ever-changing accounting principles, together with a bearish global sector scenario. Since March 25th, when the government
unveiled a housing package (which provided funding for production and improved affordability for low income units), the sector
has risen sharply. On the way down, from peak to trough the sector has declined -79% (vs. -59% Ibovespa), and from late
March to today the sector has gone up by 65% (vs. 30% Ibovespa).
However, we believe sizable upside potential remains: even after this rally, blue-chip stocks (the focus of this report) seem
fairly undervalued, in our view – estimated upside potential varies from between 57% and 152%. Despite a healthy ROE and
attractive growth prospects, only two companies trade above BVadj, and by a small margin. Thus, regardless of the past few
weeks’ upsurge, sizable upside potential remains, in our opinion.
Time to look at fundamentals: a special section of this report is dedicated to providing details on the DCF valuation
methodology from which we derive our target prices. We intend to challenge the consensus view that projecting cash flow for
housing companies is a complex task; instead, we believe it is possible to break down the valuation into a few simple blocks that
enhance visibility of where value comes from.
Government housing package and opportunities in the low income segment: we also discuss the government housing
package and other factors that should help determine or limit growth in the next few years. Of the three growth determinants we
see for developers (3Cs: Client, Capital and Capacity), the government and companies have addressed the first two, Client and
Capital, through the package and special credit lines. Now, execution capacity should determine the sector’s winners and
laggards. We believe the challenges are higher than most investors realize and companies advertise, but so are the potential
payoffs.
Our Top Picks are PDG, MRV and Rossi with a 1-Overweight rating: PDG and MRV on the back of a legacy position in the
low income segment combined with a likely boost in demand in the short term by the government package; and Rossi on
valuation (152% upside potential) - we see the discount as overdone given the company’s credentials. We rate Cyrela and
Gafisa as a 3-Underweight, despite the attractive upside potential (57% for Cyrela and 89% for GFSA). We believe Cyrela
should take a few more quarters than expected to trade-down and collect the benefits of the additional demand for low income
homes. As for Gafisa we believe short-term (operating) liquidity concerns relating to the Tenda acquisition will likely weigh on
stock performance.
Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report.
Customers of Barclays Capital in the United States can receive independent, third-party research on the company or companies covered in this
report, at no cost to them, where such research is available. Customers can access this independent research at www.lehmanlive.com or can
call 1-800-253-4626 to request a copy of this research.
Investors should consider this report as only a single factor in making their investment decision.
PLEASE SEE ANALYST(S) CERTIFICATION(S) ON PAGE 41 AND IMPORTANT DISCLOSURES, INCLUDING FOREIGN
AFFILIATE DISCLOSURES, BEGINNING ON PAGE 41.
Equity Research
Initiating on the Brazilian housing sector blue-chips

We are initiating coverage of the Brazilian housing sector with a 1-Positive rating. We believe valuations still offer attractive
upside potential, even before taking into account the new opportunities that the government housing package entails. In our
view, the potential upside ranges from 57% and 152%, assuming zero or negative growth in launches for the stocks we are
initiating on today.
In this report, we initiate coverage of the five largest and most liquid stocks within the housing sector: Cyrela, Rossi, Gafisa,
PDG and MRV, which we will refer to as blue-chips. We are bullish on the sector, and based on our forecasts we believe these
stocks still offer upside potential of around 86% in the next 12 months (despite the impressive rally witnessed recently).
In this report, we also discuss the government housing package and other factors that should help determine or limit growth in
the next few years. Of the three growth determinants we see for developers (3Cs: Client, Capital and Capacity), the government,
by means of the recently announced package, has helped provide the first two, Client and Capital and therefore, execution
capacity is what should determine the sector’s winners and laggards, in our view. We believe the challenges are higher than
most investors realize and companies advertise, but so are the potential payoffs. Please refer to the section “Government
Housing Package and the 3Cs approach” for further details.
The section “Valuation 101 – Divide to conquer”, which we consider the most important of this report, details the DCF valuation
methodology from which we derive our price targets. Further, we intend to challenge the consensus view that projecting cash
flow for Brazilian homebuilders is a complex task; instead, we believe it is possible to break down the valuation into a few simple
blocks that enhance visibility of where value comes from.
A more detailed account of the target price assessment (and DCF calculation) gains importance given the wide dispersion of
target prices (TPs) in the street, which cannot be justified by differences in margins, Ke and growth assumptions, in our view.
We believe that, despite the recent rally, no gain from the government housing package is priced in, and there is sizable upside
potential under conservative assumptions. Therefore, we believe that allowing investors to walk through our valuation
methodology (and to see how conservative we have been) is a strong support to convey our positive view on the sector.
Finally, in the “What can go wrong?“ section, we review the main points of concern of the investors that have driven stock prices
below their liquidation value during the most critical point of the crisis, of which we highlight the risk of banks pulling out of
ongoing projects and the risk of a hike in discretionary return levels (sales cancellation). We also explain why we believe that
these concerns are overdone.
We are rating MRV, PDG, and Rossi as 1-Overweight…
We believe there is a high likelihood that demand for low income units exceed expectations in the next few quarters due to the
government’s housing package (significant advertisement + considerable gain in affordability; news flow already starting to show
this), and thus MRV and PDG, which boasts a legacy exposure to low income clients, in our view are to be the main
beneficiaries in the next few quarters.
MRV is, in our opinion, the best prepared player to take advantage of the government package. We believe it is significantly
ahead of its peers on the construction, logistics and procurement processes for affordable houses production. We believe it does
not need to develop any additional skills to produce cheap, super standardized houses (government package focus).
Our 12-month TP for MRV is R$30/share (69% upside potential) and this is considering zero growth in launches from 2008
levels. It is trading at 1.15 P/BVadj and 0.89 P/LV.
As for PDG, it could benefit from the potential upside from an acquisition of a smaller listed company, which we regard as
somewhat likely to happen in the next 12 months, but not yet priced in. In our view, PDG has both funds (R$ 276mn BNDES
loan for consolidation purposes) and potential targets (13 smaller listed companies that are about to enter the most cash-
consuming part of their construction cycle and are trading below 0.3x P/BVadj) to accomplish this undertaking.
Regardless of the potential upside from acquisitions, the stock is trading barely above its BVAdj. Our 12-month TP is
R$25/share (61% upside potential); it is currently trading at 1.03 P/BVadj and 1.1 P/LV.
Rossi is by far the most discounted player in our coverage universe, by our analysis. A string of relatively unimportant negative
events, amplified by the lack of efficiency in communicating them, has weighed on stock performance since its IPO. At its current
price, Rossi is significantly undervalued, in our view, although it is a leading, competitive, capitalized and healthy company, with
no liquidity issues or any material issue to justify such a discount, in our opinion. Our 12-month TP is R$13/share (152% upside
potential). It is trading at 0.53 P/BVadj (47% below its peers’ level) and 0.56 P/LV (33% below peers). The net present value
from projects launched before 2009 (which will be cashed in before 2011), minus the debt obligations, is still 38% higher than
Rossi’s market cap, which we see as too strong a punishment for not communicating “bad news” effectively.
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Equity Research
We believe that, after its recent rally, the sector has come back into the spotlight. Therefore, investors are more likely to seek out
the fundamentals, and such a significant discount to peers and to the value of its own assets should narrow, in our view. (For
further information regarding TP methodology, please refer to the section “Valuation Methodology”).
…and Cyrela and Gafisa as 3-Underweight

Cyrela has been adopting a conservative stance towards growth especially in the mid and high income segments (where it has a
competitive edge). As for the affordable segment, notwithstanding the sizable growth potential (and equally high pay-offs), and
the energy the company is devoting to developing this business unit, trading down can prove to be more challenging and time-
consuming than the company and investors expect (please see the “Government Housing Package and the 3C’s approach”
section below for an in-depth discussion). These factors should cause the company to lag its peers in growth for now. Our 12-
month TP for Cyrela is R$18/share (57% upside potential), trading at 1.13 P/BVadj and 0.78 P/LV.
For Gafisa, despite its attractive valuation (the company trades below its BVAdj and LV), we believe that short-term (operating)
liquidity concerns could weigh on the stock performance. The acquisition of Tenda in 2008 (which we consider a rare
opportunity) has brought operating volatility and hefty short-term construction obligations to Gafisa, thus we prefer not to rate
this stock differently until the company clarifies the way out for its short-term liquidity position.
On the positive side, the company has a strong asset support for valuation (NPV of ongoing projects accounts for 110% of the
current market cap), and it has achieved a competitive edge in the low-income segment through Tenda’s acquisition. This recent
acquisition had an impact on Gafisa’s short-term liquidity position, which we believe could cause the stock to underperform its
peers during the next few months.
Our 12-month TP for Gafisa is R$28/share (89% upside potential), trading at 0.81 P/BVadj and 0.81 P/LV (for further information
regarding TP methodology, please refer to the section “Valuation Methodology”).
Figure 1: Company comparison

CYRE GFSA MRV PDG RSID
Market Cap (R$m) 4,091 1,962 2,407 2,263 984
Rating 3-Underweight 3-Underweight 1-Overweight 1-Overweight 1-Overweight
Price (Apr 15, R$/sh) 11.50 14.80 17.70 15.50 5.16
TP 12m (R$/sh)* 18.0 28.0 30.0 25.0 13.0
Potential Upside (%) 57% 89% 69% 61% 152%
Multipes
P/LV (2008) 0.74 0.81 0.79 1.03 0.52
P/BVadj
2008 1.13 0.81 1.15 1.03 0.53
2009 0.98 0.73 1.03 0.92 0.50
2010 0.88 0.68 0.94 0.93 0.48
P/E
2008 11.2 12.9 10.3 12.3 8.2
2009 9.8 15.4 4.5 4.5 4.3
2010 5.0 7.0 3.8 4.1 3.0
EV/EBITDA
2008 11.0 17.3 11.3 12.0 10.0
2009 6.9 10.5 5.4 5.3 5.9
2010 4.9 4.1 3.4 4.6 3.7
* For futher information regarding TP methodology, plase refer to the section "Valuation Methodology"
Source: Barclays Capital Research
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Equity Research
Government Housing Package and the 3Cs approach
A very useful approach, in our view, to assess the growth prospects of housing developers in Brazil was suggested by Carlos
Terepins (EVEN’s CEO). According to Mr. Terepins, a company can only grow as long as three conditions are met: demand for
units, capital availability and execution capacity, which we have re-branded as the 3Cs approach, namely Client, Capital and
Capacity. Right now, we consider that the government and companies have made timely moves to boost demand and
find alternative sources of funding despite the credit-scarce environment. It is on the execution capacity side where the
most relevant bottlenecks reside, and where the sector’s leaders and laggards should be determined, in our view. A brief
discussion of each of these conditions is provided as follows.
A few words about the Government Housing Package

A lot has already been written on the government housing package, so we will spare the reader the details of each measure. It is
far from clear whether the government will accomplish its ambitious targets for housing supply in Brazil. However, we believe it
is clear that, by making affordable houses profitable and assuming part of the credit risk, the government should significantly
enlarge the addressable market for homebuilders and unlock a pent-up demand that by far exceeds what companies are able to
deliver (in our view, capital and execution capacity should become the restricting factors to growth in the foreseeable future).
To illustrate the magnitude of these changes, Brazil has 10 million households with income between five and ten minimum
wages. These families will almost certainly be brought to the housing market on the back of government measures (insurance
granting, subsidies, state-owned banks activism, etc.) that allow for a 5 MW household to buy a R$ 60K (US$ 27K) while only
spending 20% of its income. Just as a reference, 10 million families will be added to the housing companies’ addressable
market, while MRV, the largest low-income developer, launched no more than 25 thousand units in 2008.
The bottom line is that we believe it does not matter whether the government package will fall short of its rhetorical 1mn unit
target or whether developing for households below 3 MW is doable (the government believes so). Any improvement down the
income ladder is desirable. A quick look at the chart below shows it is no exaggeration to say that demand should not be a
restriction to affordable housing growth during the next decade or so.
Figure 2: Minimum Wage Pyramid (million households)
60 57
55 7
50
50 47 3
45 7
40
40
35 11
30
30
25 30
20
3MW - 3-5MW 5-8MW 8-10MW 10MW+
The government has also approved measures to encourage demand for the mid- and mid-high income segments where
homebuilders are more exposed so far. It has raised the ceiling for units eligible for subsidized SFH loans (mostly granted by
retail banks, funded by savings accounts) from R$350K to R$500K. It has also allowed employees to withdraw their FGTS
(unemployment severance fund) funds to buy apartments up to R$500K.
Many employees see their FGTS as “non-refundable taxation,” as it barely yields inflation and can only be withdrawn in case of
retirement (or unemployment). Under the new ceiling, many people are checking the balance and looking forward to using this
money to purchase a decent apartment. Developers and banks are also working on new funding arrangements to attract these
wealthier, less risky and more profitable clients. Recently, newspapers have already displayed advertisements inviting clients to
visit showrooms and check the new funding conditions that the subsidized loans should entail.
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Equity Research
We believe it is also important to keep in mind that sizable demand remains for the mid- and high-income segments. The
affordability obtained by mid-income families (lower interest and longer tenor), which triggered the impressive volume growth
witnessed since 2006, has not reversed. The retraction observed since October seems to be much more related to a drop in
confidence than to lack of purchasing power. After a murky December and January, demand for more expensive apartments has
been bouncing back since February. Although investors seem to have shrugged off the high-income measures, we believe they
should have stronger effects over the demand of wealthier clients than most expect.
Capital – The main input for housing has already been taken care of
Another auspicious signal to housing companies is that the government seems to be aware that capital is probably the most
important and scarce input for building houses, and that listed companies have all their resources tied up in production. The
package foresees sizeable, attractive and comfortable funding support not only for construction, but also for land acquisition and
marketing expenses. So, capital deployment to enter the affordable segment should be much more modest and less
burdensome when compared to less subsidized wealthier clients.
The government is also working to provide production loans under favorable conditions that are not necessarily tied to
lower income segments. In March, Tenda announced a R$ 600mn debenture issuance to be fully acquired by Caixa
Econômica (state-owned savings and loans bank) to fund production under quite favorable terms (funding 80% of expenses with
land + construction + marketing, at TR+8%, or 9.5% interest). We believe other companies will likely announce similar credit
lines shortly, which not only gives way to working capital relief, but also puts pressure on private banks to improve funding
conditions.
It is important to note that Brazil is about to cross the 10% basic interest threshold, after which other countries (such as Mexico,
Chile and Spain) have experienced a boom in mortgage lending. Apart from the importance of reaching that mark, it is natural to
expect that as interest rates come down, additional resources (aside from the compulsory or public lines) should be channeled
to mortgage funding.
Finally, we believe blue-chip companies, which IPOed first (Cyrela, Rossi and Gafisa) or have a shorter cycle (MRV and PDG)
are about to enter the cash positive period and begin to enjoy the benefits of the remarkable growth observed from 2006 to
2008, a period in which the companies posted record high volumes and sales speed. When looking at homebuilders as a
portfolio of projects (at the end of the day, this is what they really are), we find that proceeds from legacy projects account for
roughly 70% of the current market cap. Further, we estimate that blue-chips should become net cash generators by the end of
2009, and the bulk of the proceeds should be cashed in before 2011, in stark contrast with the common wisdom that
homebuilders are growth assets whose pay-offs lie in the perpetuity.
Just to illustrate, we carried out a simple exercise with the five largest blue-chip companies (Cyrela, Gafisa, PDG, MRV and
Rossi). If we could represent everything launched by the blue-chips through a single project, it would be a R$ 26 billion project
launched in Nov. ‘07.
Launch Profile – 5 Largest Homebuilder Launches 2006-2008 Launches – Representative Cash Flow Profile
(R$ m) (R$ m)
5,000
5,000.0
4,500
4,000 4,000.0
3,500
3,000.0
3,000
2,000.0
2,500
2,000 1,000.0
1,500
-
1,000 Total Lauches Volume
ag 8
ag 9
ag 0
ag 1
no 8
no 9
no 0
no 1
fe 7
08
09
fe 0
11
08
m 9
m 0
11
R$ 26 Billion
/0
/0
/1
/1
(1,000.0)
0
500
0
1
v/
o/
v/
o/
v/
o/
v/
o/
v/
v/
v/
v/
v/
ai
ai
ai
ai
no
fe
fe
-
(2,000.0)
06
07
08
6
8
06
07
08
6
8
/0
/0
/0
t/0
t/0
t/0
n/
n/
n/
z/
z/
z/
(3,000.0)
ar
ar
ar
se
se
se
ju
ju
ju
de
de
de
m
Source: Barclays Capital Research Source: Barclays Capital Research
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Equity Research
Taking into account the evolution of our representative project, we are almost 1.5 year prior to key delivery, and a few months to
reach the turning point when the project becomes cash positive, resulting in a free cash flow of R$ 10.8 billion (70% of the
current market cap) by mid 2011. If the companies use these proceeds to prepay 100% of corporate debt (totaling R$ 3.9
billion), R$ 6.9 billion would still remain, which would be available to distribute, buy back shares, sponsor additional growth, buy
assets, prepay corporate debt or, (hopefully not), simply retain.
Capacity (Execution Capacity) – How hard will it be to trade down?

Being competitive in producing affordable houses is a completely different game, almost the opposite of being profitable selling
houses for wealthier clients. The super-customized, client-oriented business model, where the key is to win the buyers’ heart
and convey a sense of exclusivity that comes down to sales speed and higher margins, works well when focusing on the top of
the pyramid, where clients are willing to pay a premium to buy a special place to live.
When you go down the income ladder, premium for exclusivity is replaced with price sensitivity. Low installments become the
best advertisement. Investments in reducing costs often have a better payoff than a trendy decorated apartment. When moving
down-market, housing development becomes more similar to the retail business, where scale, distribution capacity,
standardization, focus on product (as opposed to focus on client) and procurement/logistics efficiency are the key success
factors.
Right now, companies are in different stages of development in their affordable business. Despite the undisputable high payoff,
trading down is usually more complex than the companies advertise. So far, large companies’ forays into the affordable segment
have been quite disappointing. For example, it has been more than two years since Cyrela unveiled its plans for the low-income
segment, and so far units below R$ 80K have represented only 8% of 2008 launches.
Gafisa’s track record (before the Tenda acquisition) has not been much better, in our view. Its low-income spin-off never took off,
and a largely heralded low-income JV named Bairro-Novo was quietly left to its partner (Odebrecht) during the fourth quarter of
2008. As for Tenda, whose acquisition (closed in 2008) we consider a rare opportunity for Gafisa to acquire a premium large low
income operator, it has developed a strong brand and a differentiated distribution chain in the affordable segment. However,
important improvements are needed on the execution side, in our view. Currently, it subcontracts roughly all the construction,
letting go sizable gains that scale and procurement should entail.
Even PDG, which has a legacy low-income exposure through its full subsidiary Goldfarb, is not as affordable as it seems.
Seventy percent of its launches during 4Q08 were tagged as low-income; however, the breakdown of these projects shows that
the average unit price has been R$167K (please note that the government housing package benefits house prices up to R$
130K), and only two low-income projects (out of 15 totaling 5% of 4Q08 launches) had average unit prices below R$ 100K.
The fact that the companies are not that exposed to the low-income segment is not bad, in our view. This is just an indication
that until now the companies have not had to go that far from their comfort zone to profitably deploy their scarce resources. And
this is the very expected behavior: companies tend to focus on the wealthiest clients available until another limiting factor
(usually capital or execution capacity) restricts growth.
This setting is about to change as the government has been improving the gains to downtrade. In our view, the challenges are
higher than most realize, and so are the potential payoffs. From now on, we believe execution capacity out of the comfort zone
(where companies have been allowed to remain so far) should be the key factor in determining the real beneficiaries of this
package.
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Equity Research
Valuation 101 – Dividing to Conquer
DCF – Sector fell and then rose sharply on sentiment – time to look at fundamentals
We have already described our top-down bullish view of the sector (client & capital available, capacity is the key to success);
now let’s take a look from a bottom-up approach. In our view, this is the most important section of the report, where we describe
in detail the DCF valuation methodology from which we derive our target prices. Further, we challenge the consensus view that
projecting the sector’s cash flow is a complex task; instead, we believe it is possible to break down the valuation into a few
simple blocks that enhance visibility of where value comes from.
A more detailed account of the target price assessment and DCF calculation gains importance given the dispersion of target
prices in the street, which can not be justified by differences in margins, Ke and growth assumptions, in our view. We estimate
that, despite the recent rally, no gain from the government housing package is priced in. We find sizable upside potential with
very conservative margin, growth and Ke assumptions (see numbers below). Therefore, we believe that allowing investors to
walk through our valuation methodology (and to see how conservative we have been) is a strong support to convey our positive
view on the sector.
Valuation 101 – Dividing to conquer

One of the most interesting things when modeling the Brazilian housing sector is the stark contrast between
simplicity/straightforwardness in forecasting a developer’s cash flow and the complexity involved in breaking this cash flow into
account records that usually drive valuation models (net income/working capital change). Housing sector accounting has always
been challenging, and addressing this matter can be so cumbersome that many throw in the towel and mark the sector as “too
complicated to look at”.
At the end of the day, a homebuilder is a portfolio of existing projects whose cash flow parameters are somewhat easy to obtain
(notes to financial statements and earnings releases). So, the first step is to calculate what we call Present Value of Legacy
Projects (PVLP), detailed below.
The second step is to gauge the present value from future projects (PVFP). Here we need to make a few assumptions about the
cash flow profile of a typical project such as margins, and the speed of sales, construction development and cash inflow. We will
briefly explain each of these blocks below and then provide an example. The valuation comes from the sum of the parts of the
value from legacy and future projects (PVLP + PVFP) adjusted for other obligations and liabilities, such as landbank needs and
net debt.
In the subsequent sections, we will disclose the breakdown for each company under our coverage, along with the parameters
used to calculate the value of each block.
Step I: Calculating the PVLP (Present Value of Legacy Projects)

The nominal value of receivables, net of the remaining obligation to finish these units, can be easily drawn from earnings
releases. We will divide the PVLP in two blocks: cash from sold units (also known as backlog units) and cash from units
launched and not sold. For the sake of simplicity, we will deduct net debt from the PVLP value in order to segregate “old
company” (legacy - net debt) from “new company” (future projects).
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Equity Research
Figure 3: Present Value of Legacy Projects (PDG Example)

Value Duration Ke (US$) Present Value Description
Extracted from the accounts receivables on the
Accounts
2,808 1.50 16% 2,307 earnings release (including the both the on-balance
Receivable
Sold Units and off-balance portions).
Cost to be Earnings release: from the Results to be Recognized
(1,020) 1.50 16% (838) breakdown (off balance).
incurred
Market value of Earnings release: extracted from the Accounts

1,286 1.50 16% 1,056
the inventory Receivables, including all the reciavables from sold
units (both the on-balance and off-balance portions)
Unsold Remaining cost=Total Cost-Cost Disbursed
Units Total Cost=(1-Backlog Mg)xMk val of inventory
Backlog margin: earnings release
Remaining Cost (391) 1.50 16% (321)
Cost disbursed: Inventory breakdown on earnings
release
Mk val of inventory: line above.
Total 2,683 2,204
(-) Net Debt (518)
PVLP (present value of lagacy projects) 1,686
It is worth mentioning that we are using the same Ke (16% in US$, 14% in real terms) of our full DCF model for PDG, and that
the 1.5 year duration is a simplification. A project takes 30 months between launch and key delivery, so this duration should
range between 1 and 2 years (so we adopted 1.5 years to simplify). Regardless of the Ke we adopt, given the short duration of
this cash flow, the PVLP amount should not vary more than 10% on the back of differences in Ke, so it can be considered a
somewhat stable support for valuation.
Step II: Calculating the PVFP (Present Value of Future Projects) – How much is each billion launched worth?
To provide a good account of value added by future projects, one should be able to calculate an important parameter of the
valuation model: the value added, at the date of the launch, of each unit launched. From now on, this number stands for Net
Present Value equivalent, or NPVe. For each set of assumptions of margins, speeds (sales, disbursement and cash inflow) and
Ke, a ratio between launches and value added can be defined. For example, if the cash flow from a project with a sales value of
R$ 100mn comes down to a R$ 15mn present value, we say that the NPVe for this project is 0.15. So if a company launches
one billion reais each year, from the cash-flow standpoint, it is as if it generates R$ 150mn for the shareholder yearly.
Coming back to the PDG example, below we show the parameters for a typical project and the resulting cash flow. With our 16%
Ke (in US$, 14% in real terms), a R$ 1 billion project should come down to a value added (at the date of the launch) of R$
153mn, so our NPVe is 0.153. G&A must also be deducted from the generated cash flow. We assume that G&A costs amount to
an additional 5% of the launched value each year (this is another very stable parameter across the industry). As a result, each
billion PDG launches is worth R$ 103mn (R$ 153 of NPVe less 5% of R$ 1bn of G&A).
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Equity Research
Figure 4: Typical Launch Parameters (for PDG)
Margin Assumptions (%VGV)

Construction + Land 64.0%
Taxes 6.8%
Sales Expenses 6.5%
% of Construction Financed 60%
NPVe 0.153x
Year 1 Year 2 Year 3 Year 4+

Sales Speed 63% 38% 0% 0%
Cash Received 16% 44% 0% 0%
Disbursment Speed 39% 61% 0% 0%
Cash flow* -139.9 285.3 46.3 0.0

% of PSV** -14.0% 28.5% 4.6% 0.0%
* For a project with sales value of R$1000.
**Potential Sales Value (see glossary for further explanation)
Source: Barclays Capital
We assume PDG will post launches of R$2.5bn in 2009, with no real growth after that (a conservative growth assumption, in our
view). So, the value added to the shareholder each year will be R$2.5bn x (NPVe – G&A Burden) = 2.5bn x (0.153 – 5%) =
R$258m. Therefore, the present value, with a real Ke of 14% (16% in US$ nominal – 2% inflation) and g=0, amounts to
R$2.097bn (from the perpetuity formula 258 x (1+14%)/14%).
Landbank build up: we treat landbank as a working capital need, which varies in tandem with next year’s launches. As in our
base case scenario PDG will not post any real growth in launches, land expense will not affect valuation. But as a reference, we
assume landbank net exposure (book value of land – accounts payable from land acquisition) represents 12% of next year’s
VGV (in line with historical levels). So if PDG raise its launches in 2009 by R$1bn, we estimate that it will need to deploy
approximately R$120mn (12% of R$1bn) in land.
Interestingly, this sum of the parts valuation, with all the parameters disclosed came down to practically the same result as the
full DCF model (table below). It is worth mentioning that all the parameters used to carry out PDG’s simple valuation we have
just gone through were the same used for our full model.
Figure 5: PDG’s Sum of The Parts Model (SOTP)

Equity (R$m)
L: Legacy Projects 1,686
L1 Sold Units NPV 1,469
L2 Units Launched and not sold 735
L3. (-) Net Debt + Other Assets NPV (518)
F: Future Projects 2,097
F1. New Launches NPV 3,115
F2. G&A Burden (1,018)
F3. Landbank Burden -
S: Sum of the Parts Valuation (S+F) 3,745
Other Adjustments not captured on the SOTP 40
D: DCF Valuation (Full Model) 3,785
Difference % 1.1%
Better yet, for all the stocks on which we have initiated, the difference between the full DCF model (from where we derive our
target prices) and the above-mentioned simple model approach has not exceeded 10% (see table below). As we stated in the
beginning of this section, it is possible to model the sector with very clear, understandable, available and straightforward
parameters and still reach a result very similar to the full model, which is exceedingly time consuming.
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Equity Research
Figure 6: SOTP vs. Full DCF
R$ millions MRV RSID GFSA CYRE

L: Legacy Projects 1,618 1,357 2,285 2,252
L1 Sold Units NPV 1,223 1,288 2,403 2,557
L2 Units Launched and not sold 671 644 1,129 856
L3. (-) Net Debt + Other Assets NPV (277) (575) (1,247) (1,161)
F: Future Projects 2,101 612 1,135 2,814
F1. New Launches NPV 3,064 1,437 2,216 4,091
F2. G&A Burden (1,065) (634) (1,069) (1,362)
F3. Landbank Burden 101 (190) (13) 85
S: Sum of the Parts Valuation (S+F) 3,718 1,969 3,419 5,065
Other Adjustments not captured on the SOTP (157) 192 (97) 506
D: DCF Valuation (Full Model) 3,562 2,161 3,322 5,571
Difference % -4.4% 8.9% -2.9% 9.1%
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Equity Research
Multiples and Accounting Principles
Moving from earnings multiples to net-worth multiples

Accounting principles have always been one of the most challenging issues to deal with when analyzing Brazilian homebuilders.
The combination of backward-looking revenues recognition (percentage of completion), long production cycles (three years),
expensing of marketing costs, discretion to record financial expenses as COGS and ever-changing accounting practices,
combined in a setting of outsized growth (2006-2008), has made earnings and margins simply unpredictable and often
incomparable among companies.
Worse yet, after 2010, Brazilian companies will adhere to the IFRS (International Financing Reporting Standards) principles,
which, for the sake of conservativeness, state that revenues can only be recognized after “the entity has passed control of the
goods or other assets to the buyer”. This implies that revenues will be recognized 30 months after a project is launched. Though
it is a noble principle, it brings even more volatility to earnings. Further, it makes the income statement a poor gauge of
companies’ economic performance. A two-year delay between sales and revenues recognition, with SG&A and part of financial
expenses weighing on the results as expensed, has eroded EBITDA and earnings (along with their respective multiples) as
references of cash flow generation for the housing sector. As a reference, we show below how Cyrela’s 2008 results would
appear under different GAAPs:
Figure 7: GAAP Sensibility Table
R$ millions Current IFRS Sales Based

Revenue Recogition Percentage of project After project completion Fully recognized at the
evolution moment of sale.
Revenues 2008 2,667 1,044 3,067
Gross Profit 1,071 419 1,231
Mg 40.1% 40.1% 40.1%
Earnings 366 -172 499
Mg 13.7% -16.4% 16.3%
Implied P/E (2008) 11.0 NA 8.1
In our opinion, the adoption of the IFRS principles should give way to the retirement of P/E and EV/EBITDA as credible metrics
to compare assets in the real estate sector. And the market should increasingly seek net worth multiples to support investment
decisions.
Net Worth Multiples (P/Liquidation Value, P/Adjusted BV and P/BV)

In the previous section of this report, we mentioned that an important part of the value of housing companies comes from legacy
assets (with a somewhat short duration). Therefore, it is important to develop metrics to gauge the Net Worth for housing
companies. We define Net Worth generically as what remains for shareholders after assets and receivables are cashed in and
obligations are cashed out. Net Worth-based multiples become even more valuable now that uncertainty about volumes and
margins, combined with a backward-looking GAAP, deteriorates earnings predictability and the widely used multiples such as
P/E and EV/EBITDA.
We will calculate and display below three of the most broadly used Net Worth multiples: P/BV, P/Adjusted BV and P/LV. For a
healthy sector, Net Worth consists in an important lower bound for valuation. Trading below such benchmark should be the
outcome for companies/sectors with low profitability (below Ke) or negative growth prospects. Housing companies are at the
opposite spectrum with healthy IRRs at the project level (above 20% unleveraged, real, after tax) and strong growth prospects
(given the sizable pent-up demand for housing in Brazil).
Under the current valuation levels, many premium companies are trading below or in line with Net Worth (in spite of the recent
rally), which seems to be more a distortion from dislocated markets, moved by sentiment, than an adjustment to deterioration in
growth prospects. Above the BVAdj floor, margins, leverage and asset turnover are the dominant factors to determine relative
valuation among companies.
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Equity Research
We also believe that Liquidation Value is superior to the other metrics not only because it encompasses obligations related to
the completion (and receivables) from projects launched to date but also because it allows for very interesting sensitivity
analysis. We plan to shortly release a note with an in-depth discussion about multiples for Brazilian housing companies.
Figure 8: Liquidation Value Breakdown (R$ millions)
Cyrela Gafisa MRV PDG Rossi

Receivables from Sold Units 7,162 4,663 1,921 2,808 2,814
(-) Obligations from Sold Units (3,217) (1,594) (454) (1,020) (1,183)
Market Value of Units for Sale 2,061 2,577 1,592 1,286 1,544
(-) Construction Obligations (641) (708) (593) (391) (688)
Book Value of Land 2,152 673 1,199 606 317
(-) Payables from land acquisition (423) (365) (263) (321) (344)
Other Assets - - - - -
(-) Other liabilities - - - - -
(-) Net Debt (1,244) (1,269) (277) (610) (575)
(-) Minority Shareholders (289) (471) (83) (169) -
Liquidation Value 5,562 3,506 3,042 2,189 1,886
P/LV 0.74 0.56 0.79 1.03 0.52
BV Adjusted 3,616 2,424 2,089 2,203 1,845
BV 2,121 1,612 1,552 1,476 1,238
Deferred Income 1,869 1,015 538 727 607
Avg Stake 80% 80% 100% 100% 100%
P/BVAdj 1.13 0.81 1.15 1.03 0.53
P/BV 1.93 1.22 1.55 1.53 0.79
Market Cap 4,091 1,962 2,407 2,263 984
# of shares 356 133 136 146 191
Closing price 11.50 14.8 17.70 15.50 5.16
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Equity Research
What can go wrong?

Naturally, in such an uncertain environment, it pays to inquire as to what can go wrong. In this section, we will discuss two very
critical events that could place the sector in a difficult situation and that could change our positive stance towards the sector:
banking pulling out of ongoing projects or a hike in discretionary cancellations. We believe that much of the stocks’
underperformance, especially at the height of the crisis, has been driven by these concerns. This section contains a detailed
explanation of these risks and why we regard them as overdone.
1. Banks could exit the projects they are sponsoring

Banks play a key role in Brazilian homebuilders’ business models, being responsible for the funding of up to 80% of construction
expenses through SFH (Sistema Financeiro da Habitação). After a project is delivered, banks are also decisive on the
securitization of receivables. Loans for housing (for both construction and mortgage) enjoy a secure source of funding, as banks
are required to channel at least 65% of their savings account balances to real estate related loans.
We believe it is not unreasonable to state that this is funding that homebuilders mostly take for granted and, if it ceases in such a
money-scarce environment, many companies would be driven into insolvency or be forced to sell inventories with discount.
Construction loans drastically reduce the equity tied in each project (from 20-27% of the construction cost to 40%-50%, as per
the chart below), thereby providing an important and necessary source of cash flow relief.
Figure 9: Typical project cash flow profile (with and without funding) - % of PSV
30%
20%
20%
10%
0%
-9%
-2 Half -1 Half Launc h 2nd Half 3rd Half 4th Half 5th Half 6th Half 7th Half
-10% -6%
-21% -17%
-23% -23%
-20% -26%
-20%
-21%
-30%
-28%
-40%
-40%
-50% -45%
Ac crued Cas h F low Acc rued Cas h Flw o Ex-Debt
It is worth mentioning that, even if banks wished to pull out (and they don’t, with falling interest rates and no signs of
delinquency), it would be rather costly. Each project is sponsored by a single bank, whose logo shows up on the billboard as a
partner and co-sponsor of the project; the partnership with a large bank is seen as compelling proxy of security by potential
buyers, who take their decision to buy counting on the promise of a mortgage on key delivery.
The terms of the loan, and the requirements that the developer and the buyer of a project must satisfy to receive the
construction funding, along with a non-binding guarantee to finance buyers after key delivery (three years after the launch), are
stated in a commitment letter signed between banks and developers. As this letter must be signed before launching, funding
conditions for everything launched so far has already been set. So there is no “naked” or unfunded project that is launched.
Besides the contractual restriction and the reputational issue, banks could additionally face regulatory questioning. As
mentioned, in Brazil banks are required to channel 65% of their savings account balances to housing related loans. Interestingly,
the Central Bank allows banks to take into account all the future funding commitments to reach this regulatory target, provided
the commitment letter is signed. So, if banks decide not to release the construction loans previously agreed with developers,
they would be to failing comply with the 65% minimum requirement, thereby providing maneuvering room for the monetary
authority to pull the strings and prevent any major disruption in the housing sector.
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Equity Research
As for the cancellation clauses established in the contract, the project must reach a minimum level of sold units (usually 50%)
and a minimum equity commitment (usually 20% or 30% of the total construction cost) to access the funding. However, a poorly
performing project will rarely reach the point of being rebuffed by the sponsor bank, as homebuilders are allowed to cancel the
project until six months after launching, which prevents companies from carrying out poorly sold projects that could be ineligible.
Additionally, the government is also working to provide production of new credit lines under favorable conditions that are
not necessarily tied to lower income segments. In March, Tenda announced a R$ 600mn debenture issuance to be fully
acquired by Caixa Econômica (state-owned savings and loans bank) to fund production under quite favorable terms (funding
80% of expenses with land + construction + marketing, at TR+8%, or 9.5% interest). We believe other companies will likely
announce similar credit lines shortly, which not only gives way to working capital relief, but also puts pressure on private banks
to improve funding conditions.
Given that 1) the terms for both construction funding and mortgage concession are pre-defined by contract for all the projects
launched before 2009, 2) it is rather costly to banks to pull out of a project owing to contractual, reputational and regulatory
constraints, 3) housing related spreads are becoming increasingly attractive in an environment of one digit interest rates (and
there appears to be no hike in delinquencies on the horizon), we believe that neither funding for construction nor ability to
securitize buyers’ receivables should be a constraint for the successful conclusion of a project.
Return of Units (discretionary sales cancellations)

First of all, it is important to state that, differently from other countries, buyers are not allowed to cancel a purchase intentionally.
A unit can only be returned if the client is in delinquency. Naturally if a client is really willing to pull out, he can suspend
payments and become delinquent, and technically return the unit. So the gains from 2007/2008 launches should not be taken for
granted as buyers could decide (or be forced by economic constraints) to return units across the board.
Not least because such an outcome would be negative for the industry, and detrimental to the business model, the contracts are
set to make it difficult to return the unit. The conditions are rather punitive for buyers; the standard contract states that in case
delinquency triggers the cancellation of the contract before key delivery (units cannot be returned after key delivery), the buyer
will have to deduct from the amount returned:
1. Approximately 4% of brokerage commission (this amount was already paid to the broker, and is non-refundable).
2. 7% of the total amount paid until the date of the cancellation (nonrefundable taxes)
3. Up to 15% of the total sales price of the unit (limited to the amount paid).
A typical client who is willing to return a unit will lose 60% of the amount paid, and companies normally work with a cancellation
rate below 5% total sales (10% for lower income segments); sales figures are reported net of cancellations. Further, most units
are returned within the very few months after the unit acquisition by virtue of lack of payment. So far, despite the deterioration in
the economic environment, companies have not detected any discernable increase in cancellation levels.
Companies usually adopt a friendly approach to the client on cancellation; they rarely retain the 15% of the total unit value that
they are allowed to, not least because the hesitant buyer is by and large the less creditworthy, who will likely have difficulties in
being accepted by the banks on key delivery. It is worth mentioning that this is a rather draconian clause, which allows the
developer to retain virtually 100% of the down payment until cancellation date and, therefore, if adopted, could entail judicial
issues across the board. However, if the trend changes and the level of cancellations rises so as to worsen solvency, the
companies will likely be more strict in order to curb any sharp rise in cancellations.
In the 10 years leading up to 2003, Brazil experienced a number of economic slumps (the country had economic downturns in
1992, 1996, 1997, 1998, 2001 and 2002); according to developers that witnessed (and survived) such a bumpy period,
cancellation has never exceeded 10%, which consists in sensible anecdotal evidence that concerns about a severe hike in
cancellation levels seem overdone.
The main takeaway from this discussion is that, despite a challenging outlook for the industry, a scenario of a hike in
cancellations of pre-sold units is not next door, buyers remain quite committed, and sales speeds have bounced back since
February, which bodes well for the profitability of units in inventory. So, despite the uncertainty about the future margins and
volumes, we believe the projects launched to date should be considered a good and trustworthy support for valuation.
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Equity Research
Valuation Methodology
PDG: Our R$25.0/share 12-month price target is derived through our DCF model in which we discount PDG's cash flows up to
2017 with a Cost of Equity of 16.0% (in US$ nominal, 14% real) and 2% perpetuity growth (in US$ nominal, 0% real). This price
target translates into 2009E EV/EBITDA of 7.7x EBITDA of R$ 602.0mn and P/E of 7.5x applied to 2009 EPS of R$2.95.
Rossi: Our R$13.0/share 12-month price target is derived through our DCF model in which we discount Rossi's cash flows up to
2017 with a Cost of Equity of 17.0% (in US$ nominal, 15% real) and 2% perpetuity growth (in US$ nominal, 0% real ). This price
target translates into 2009E EV/EBITDA of 11.2x EBITDA of R$ 275.5mn and P/E of 10.8 applied to 2009 EPS of R$ 1.20.
Cyrela: Our R$18.0/share 12-month price target is derived through our DCF model in which we discount Cyrela's cash flows up
to 2017 with a Cost of Equity of 16.0% (in US$ nominal, 14% real) and 2% perpetuity growth (in US$ nominal, 0% real ). This
price target translates into 2009E EV/EBITDA of 10.7 EBITDA of R$ 590.2mn and P/E of 15.1x applied to 2009 EPS of R$1.17.
Gafisa: Our R$28.0/share 12-month price target is derived through our DCF model in which we discount Gafisa’s cash flows up
to 2017 with a cost of equity of 17.0% (in US$ nominal, 15% real) and 2% perpetuity growth (in US$ nominal, 0% real). This
price target translates into 2009E EV/EBITDA of 18.3x EBITDA of R$ 256.2 mn and P/E of 29.0 applied to 2009 EPS of R$ 0.96.
MRV: Our R$30.0/share 12-month price target is derived through our DCF model in which we discount MRV's cash flows up to
15
Consumer
MRV Engenharia e Participacoes SA (MRVE3.SA)
The Only Full-Fledged Low Income Player Guilherme Vilazante Edoardo Biancheri
BBSA, Sao Paolo BBSA, Sao Paolo
+55 11 5509 3376 +55 11 5509 3348
Stock Rating Price Target
New: 1-Overweight New: BRL 30.0
Old: 0-Not Rated Old: BRL N/A
Sector View: 1-Positive Price (15 Apr 2009): BRL 16.90
Fiscal Year End: DEC 52-Week Range: 40.49 - 6.45
Stock Overview Chart EPS (BRL)

MRV Engenhar ia e Par t icip acoes SA
35
2008 2009 2010 2011
Actual Old New Old New Old New
25
EPS 1.71A NA 3.94E NA 4.71E NA 3.10E

15
Source: Barclays Capital Estimates

5
Vol um e
6M
4M
2M
0
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr
Source: LehmanLive
Investment Conclusion
We are initiating MRV with a 1-Overweight rating and a 12-month price target of R$30.0 (US$13.8). In 2009, MRV addressed
what we believe were the main drawbacks weighing on the stock performance, namely sluggish sales speed and rapid cash-
burn pace. The improvement has been obvious as the stock has been the sector’s best performer YTD, rising 72% vs. + 21% for
the Ibovespa. In spite of the stock’s strong performance, we believe that current prices are still lagging fundamentals. Even if we
use a conservative assumption for volume growth (we froze forecast launches on 2008 levels from 2010 on, with a dip in 2009 of
-12% growth), we still find an attractive 70% upside potential for MRV.
We believe there is a high likelihood that demand for low income units exceed expectations in the next months due to the
government’s housing package (significant advertisement + considerable gain in affordability; news flow already starting to show
this), and thus MRV and PDG, which boasts a legacy exposure to low income clients, are to be the main beneficiaries in the next
few quarters.
MRV is, in our opinion, the best prepared player to take advantage of the government package. We believe it is
significantly ahead of its peers on the construction, logistics and procurement processes for affordable houses production. We
believe it does not need to develop any additional skills to produce cheap, super standardized houses (government package
focus).
We would like to point out that all numbers in this report were derived using a zero growth assumption, as was the 70% upside
potential. If we were to factor in some growth during the upcoming years (which we believe would be a reasonable assumption
given the aforementioned advantage that should cause the company to benefit from the government’s package), this potential
upside would go up accordingly. Therefore, we believe MRV could be a good option not only for a value play (70% potential
upside with zero growth) but also a way to play the sector’s growth (please refer to the section, “Government Housing Package
and the 3C’s approach” in our industry note, titled “Brazilian Housing Developers: Fell and then Rose Sharply on Sentiment –
Time to Look at Fundamentals”, for discussion).
One possible reason for the stock trading at this discount to liquidation value (0.89x LV) could be general market concerns
around MVR’s short-term liquidity, given its current cash availability of R$150mn and a track-record of cash outflows of around
16
Equity Research
R$200mn during the last few quarters. However, we do not see this as a major concern given that MRV’s projects are now
moving into the cash-positive part of the cycle, additionally it has issued a R$100mn debentures during 1Q09 (with a program
open to raise additional R$200m).
Company Profile
MRV is Brazil’s largest real estate developer and builder in the low-income segment in terms of number of units developed and
cities served. MRV has 29 years of experience in the low-income segment and in all cities in which it operates it offers three
different products through a highly standardized production line. This experience and operating model generally allows MRV to
achieve industrial scale (in the construction of its developments) at low production costs and with high quality advantages.
During this period, it has also been the only company in Brazil fully focused in the low-income segment and thus we believe it
will be in a premium position to benefit, in the near future, from forecast high demand (amplified by government package) in the
segment. Additionally, the company has a long track record in accessing the special financing programs of the Caixa Econômica
Federal, the main conduit for government mortgage funding.
Investments Positives
We believe the company’s focus on the low income segment and vast experience in mass low-cost production makes it
the No. 1 candidate to benefit from government’s package.
MRV is the only company that already has a scalable construction, logistics and procurement processes in place to
produce super standardized affordable units with strict cost control.
Already owns a sizeable landbank on the segment that the government package aims at.
Strong relationship with Caixa Economica Federal, the primary source of financing for the low income segment.
Risks and Concerns

Recent problems in raising cash from credit lines. Currently has cash availability of R$150mn for new projects and
investments (last year it had net cash outflow of R$200mn per quarter). However, projects are already going into the
cash inflow part of the cycle, the company has low leverage and recently issued R$100mn debenture program (that can
go up to R$300mn).
Unexpectedly low sales volume in 08; however, it has been signaling a strong rebound during 1Q09.
Valuation
Our R$30.0/share 12-month price target is derived through our DCF model in which we discount MRV’s cash flows up to 2017
with a forecast Cost of Equity of 16.0% (in US$ nominal, 14% real) and 2% perpetuity growth (in US$ nominal, 0% real) from
2010 on (in 2009 decreased growth by 12% bringing back to 2008 levels in 2010).
We are also breaking down the valuation into blocks to provide more transparency on the source of the value, along with the
assumptions that underpin each valuation part. For a more in-depth discussion about this methodology, please refer to the
section titled “Valuation 101 – Dividing to Conquer” in our industry piece.
17
Equity Research
Key Assumptions
As for the present value of future project (PVFP) we adopted very conservative assumptions for growth (-12% for 2009, then
going back to 2008 levels, zero growth after that), combined with parameters for a typical launch that come down to NPVe of
0.160x (see assumptions below).
Figure 1: Launches and Valuation Assumptions Figure 2: Typical Project Cashflow Profile (% of PSV)
40%
24% 24%
24%
Launches 13% 16%
20%
2008A 2,533 26% 26% 26%
17%
2009E 2,222
0%
CAGR 09-12 7.7% 1st Half 2nd Half 3rd Half 4th Half 5th Half 6th Half 7th Half
Perpetuity Growth 0.0% -20%
Ke (US$ nominal) 16% -25% -25%
PVLP** (R$m) 1,618 -40%
*Expected Net Present Value

**Present Value of Launched Project -60%
(see glossary for further explanation) Cash Flow Cash Flow before funding
Figure 3: Typical Launch Parameter

Taxes 6.8%
Sales Expenses 5.5%
NPVe 0.160x

Cash flow* -248.5 405.8 83.9 0.0

% of PSV** -24.9% 40.6% 8.4% 0.0%
These parameters are based in the profile of MRV's typical project, we assume a gross margin at project level of 35.7% (versus
peers' average of 34.6%) and a sales speed (duration) of 9 months (versus peers' average of 12 months) that reflects MRV's
exposure to low income segment. It is worth mentioning that these parameters are somewhat stable across each income
segment.
Price Target Derivation and Forecasts

As a consequence of the parameters stated above, with a cost of equity of 16% in US$ and a forecast growth in perpetuity of 2%
(in US$, zero in real terms) after 2010, we reach an equity value of R$3.56bn (TP Spot of R$26/Share, 12m of R$30/share).
Please find below the valuation breakdown, main metrics and multiples along with our forecast for Income Statement and
Balance Sheet.
18
Equity Research
Figure 4: Where Value Comes From? Figure 5: Valuation Breakdown

Equity (R$m) 4,000
L: Legacy Projects 1,618 Market Cap Line --------
L3. (-) Net Debt + Other Assets NPV (277) 3,000
F: Future Projects 2,101 1,944
(R$ millions)
2407
F2. G&A Burden (1,065) 2,000
F3. Landbank Burden 101 3,562
Other Adjustments not captured on the SOTP (157) 1,000
D: DCF Valuation (Full Model) 3,562 1,618
Difference % -4.4%
# of shares 136
TP Spot 26 0
Legacy NPV Future Projects Equity Target
TP 12m 30
Figure 6: Estimates and Valuation Ratios

(R$ Millions) 2008 2009E 2010E
Launches (% Consolidated) 2,533 2,222 2,615
Sales (% Consolidated) 1,544 2,261 3,068
Other Key Variables
Revenues 1,075 2,288 3,184
EBITDA 237.7 587.6 765.9
Margin 22.1% 25.7% 24.1%
Net Income Adj 232.9 536.3 640.8
Net Margin 21.7% 23.4% 20.1%
EPS 1.71 3.94 4.71
Multiples
P/LV 0.89 N/A N/A
P/BVAdj 1.15 1.03 0.94
P/E 10.3 4.5 3.8
EV/EBITDA 11.3 5.4 3.4
Financial Statements
Figure 7: Income Statement

(R$ Millions) 2008 2009E 2010E
Net Revenue 1,075 2,288 3,184
(-) Cost of Sold Units (643) (1,419) (2,145)
Gross Profit 432 869 1,039
(-) SG&A (176) (195) (253)
Operating Profit 256 674 785
Financial Results 41 17 46
Net Income (reported) 233 581 720
(+) Other Adusts 0 (45) (79)
Net Income (adjusted) 233 536 641
19
Equity Research
Figure 8: Balance Sheet

(R$ Millions) 2008 2009E 2010E
ASSETS
Cash and near cash 150 447 734
Accounts receivable from clients 701 1,175 1,158
Inventories 1,176 1,493 1,412
Others 70 70 70
Total Current Assets 2,097 3,185 3,374
Accounts receivable from clients 449 659 549
Others 62 62 62
Total Long Term Assets 511 721 611
Investments & Other 11 11 11
PP&E 50 52 54
Deferred 13 10 8
Total Permanent Assets 74 73 72
TOTAL ASSETS 2,682 3,978 4,057
Liabilities
Debt 68 196 144
Accounts payable for site acquisition 199 199 199
Advances from Clients (ST/LT) 82 82 82
Others 200 242 264
Total Current Liabilities 549 720 690
Debt 359 1,040 764
Accounts payable to sites acquisition 63 63 63
Others 69 69 69
Total Long Term Liabilities 491 1,172 896
Minority Interests 83 174 199
Deferred Income 7 7 7
Shareholders' Equity 1,552 1,988 2,347
Others - - -
TOTAL LIABILITIES 2,682 4,061 4,139
20
Consumer
PDG Realty SA Empreendimentos e Participacoes
(PDGR3.SA)
Significant Upside Potential; M&A Call Not Priced Guilherme Vilazante Edoardo Biancheri
+55 11 5509 3376 +55 11 5509 3348

PDG Realt y SA Em p r eendim ent os e Par t icip acoes
28
24
2008 2009 2010 2011
20
16 EPS 1.09A NA 2.95E NA 3.25E NA 1.94E
12

8
Volum e
10M
8M
6M
4M
2M
0
Source: LehmanLive
We are initiating coverage of PDG with a 1-Overweight rating and a 12-month target price of R$25.0 (US$ 11.5).
Notwithstanding the recent rally (+133% from bottom in Nov 08, vs. +48% Ibov), we consider that the valuation is not yet
reflecting any growth: even though we assume the company will keep its 2008 launches level long-term, we believe there is still
upside potential of 61% from current levels.
Additionally, we regard the likelihood that the company succeeds in acquiring smaller listed companies during the next 12
months as high and believe that this upside potential is not duly priced in. We believe that it has both the resources (R$276mn
BNDES loan for consolidation purposes) and potential targets (13 smaller listed companies that are about to enter into the most
cash-consuming part of their construction cycle and are trading below 0.3x P/BVadj) to accomplish this.
Company Profile
PDG Realty is a leading developer that operates on all different income segments through six subsidiaries. The company, which
stemmed from the merger of several different subsidiaries, continued to grow through acquisitions after its IPO. PDG boasts a
distinguished position on the low income segment through its subsidiary Goldfarb as well as a significant exposure to the mid-
and mid-high income segment through other subsidiaries. The company’s strong M&A track record combined with its
comfortable cash position places the company as a natural consolidator in the sector, in our view.
Investment Positives
PDG has the potential to profit from the government package (please refer to the section, “Government Housing Package and
the 3C’s approach” in our industry note, titled “Brazilian Housing Developers: Fell and then Rose Sharply on Sentiment –
Time to Look at Fundamentals”, for discussion) through Goldfarb, one of the largest low-income operators and the largest
client from the Caixa Economica mortgage business.
21
Equity Research
PDG (which was already in an enviably comfortable leverage situation) has raised R$ 276mn while its peers are short of cash
and the market is all but closed, therefore positioning itself as a natural consolidator (with BNDES support), in our view. Just
as a reference of the potential gains from acquisitions, the 13 smallest listed homebuilders are trading at an average of 0.3x
BVadj and 0.2x LV and are about to enter the most critical (and cash consuming) part of the cycle.
The company boasts a distinguished operating performance since its IPO; it has been posting record sales speed quarter
after quarter, while keeping margins at healthy levels. Surprisingly, even after the credit crisis became known, the company
has managed to keep its pace of launches and posted superior sales speed.
Seasoned management with financial market and private equity experience whose compensation is highly variable and linked
to the company’s performance.
Risks and Concerns

CHL and Goldfarb, which together are responsible for more than 70% of PDG launches, are somewhat dependent on their
former controllers. PDG has been very successful in incorporating new businesses and is possibly addressing the
succession issue in its subsidiaries; however, we believe this dependence is still a source of risk.
We believe PDG still has work to do in order to profit from its edge in the affordable segment. So far it is still very
concentrated in large cities, focusing on clients that are far wealthier than the government housing package’s target. For
example, in 4Q08 its low-income projects had an average price of R$167k (remember that government package benefits
house prices up to R$130k), and only two low-income projects out of 15 (totaling 5% of 4Q08 launches) had average units
priced below R$100k.
Valuation
Our R$25.0/share 12-month price target is derived through our DCF model in which we discount PDG's cash flows up to 2017
with a cost of equity of 16.0% (in US$ nominal, 14% real) and 2% perpetuity growth (in US$ nominal, 0% real).
section “Valuation 101 – Dividing to Conquer” in today’s industry note titled “Fell and Then Rose Sharply on Sentiment – Time to
Look at Fundamentals.”
Key Assumptions
As for the present value of future projects (PVFP) we adopted very conservative assumptions for growth (-4% launches growth
YoY in 2009, zero growth after that), combined with parameters for a typical launch that come down to NPVe of 0.153x (see
assumptions below).
60%
50%
Launches
40%
2008A 2,611
19%
2009E 2,500 15% 19%
20%
CAGR 09-12 0.0% 23% 23% 23%
Perpetuity Growth 0.0% 0%

-13%
1st-4%
Half 2nd Half 3rd Half 4th Half 5th Half 6th Half 7th Half
Ke (US$ nominal) 16%
PVLP** (R$m) 1,648 -20% -14%
-15%
Source: Barclays Capital Source: Barclays Capital
22
Equity Research
Figure 3: Typical Launch Parameters

Taxes 6.8%
Sales Expenses 6.5%
NPVe 0.153x

Cash flow* -139.9 285.3 46.3 0.0

% of PSV** -14.0% 28.5% 4.6% 0.0%
These parameters are based on the profile of PDG's typical project; we assume a gross margin at project level of 33.6% (versus
peers' average of 34.6%) and a sales speed (duration) of 10.7 months (versus peers' average of 12 months) that reflects PDG's
exposure to low-income segment with focus in larger cities. It is worth mentioning that these parameters are somewhat stable
across each income segment.
Target Price Derivation and Forecasts

As a consequence of the parameters stated above, with a cost of equity of 16% in US$ and a growth in perpetuity of 2% (in
US$, zero in real terms), we reach an equity value of R$3.79bn (TP Spot of R$22/Share, 12m of R$25/share). Please find below
the valuation breakdown, main metrics and multiples along with our forecast for Income Statement and Balance Sheet.
Figure 4: Where Does Value Come From? Figure 5: Valuation Breakdown

Equity (R$m) 4,000
L: Legacy Projects 1,648 Market Cap Line --------
L1 Sold Units NPV 1,536 3,500
L3. (-) Net Debt + Other Assets NPV (518) 3,000
2,137
2,500
(R$ millions)
F1. New Launches NPV 3,233 2613

F2. G&A Burden (1,055) 2,000 3,785
F3. Landbank Burden 1
S: Sum of the Parts Valuation (S+F) 3,826 1,500
Other Adjustments not captured on the SOTP (41)
1,000
Difference % -1.1% 500
# of shares (fully dilluted) 169
TP Spot 22 0
TP 12m 25 Legacy NPV Future Projects Equity Target
23
Equity Research

(R$ Millions) 2008 2009E 2010E
Other Key Variables
Revenues 1,210 2,182 2,734
EBITDA 240.4 602.0 690.1
Margin 19.9% 27.6% 25.2%
Net Income Adj 183.7 497.5 547.4
Net Margin 15.2% 22.8% 20.0%
EPS 1.09 2.95 3.25
Multiples
P/LV 1.03 N/A N/A
P/BVAdj 1.03 0.92 0.93
P/E 12.3 4.5 4.1
EV/EBITDA 12.0 5.3 4.6

(R$ Millions) 2008 2009E 2010E
Net Revenue 1,210 2,182 2,734
Gross Profit 472 798 906
(-) SG&A (212) (257) (276)
(+) Other Adusts (29) (60) (71)
24
Equity Research

(R$ Millions) 2008 2009E 2010E
ASSETS
Inventories 1,056 1,050 992
Others 136 136 136
Accounts receivable from clients 747 1,196 1,239
Others 161 161 161
Total Long Term Assets 908 1,356 1,400
Investments & Other - - -
PP&E 76 76 77
Deferred 297 238 178
TOTAL ASSETS 3,247 4,343 4,524
Liabilities
Debt 219 396 450
Others 264 268 240
Debt 647 1,168 1,328
Others 89 89 89
Total Long Term Liabilities 818 1,338 1,499
Deferred Income - - -
Others - - -
25
Consumer
Rossi Residencial SA (RSID3.SA)
Overdone Penalty for Miscommunication Guilherme Vilazante Edoardo Biancheri
+55 11 5509 3376 +55 11 5509 3348

Rossi Resid encial SA
18 2008 2009 2010 2011

14 Actual Old New Old New Old New
10 EPS 0.63A NA 1.20E NA 1.73E NA 1.84E
6

2
Volum e
5M
Source: Lehm anLive
We are initiating Rossi Residencial with a 1-Overweight rating and a 12-month TP of R$13 (US$6.0), a potential upside of 152%
from current levels. Among stocks in the industry, Rossi’s share price decline appears to be one of the steepest, having fallen
92% since its highs in Nov 07 (vs. -56% Ibov). We find that, to a significant degree, it is the most discounted stock among the
blue-chip housing developers in Brazil.
In the past, Rossi had been recommended by many analysts. The company is considered a leading and competitive developer
by its both competitors and partners, with a competitive edge (especially in certain regions of São Paulo’s countryside). It is a
preferred partner for banks for its conservative credit concession policy; it has built a sizeable landbank, and it is in a rather
comfortable liquidity position, in our view (after an R$150mn rights issue sponsored by the controller in 2009).
Rossi’s main drawback, in our opinion, revolves around what is considered its negative track record involving communications
with the market, which tends to bring an unnecessary volatility to the stock. It also creates what we believe is an unfair
perception that Rossi is a poor operator. In the past, a string of relatively unimportant negative events was amplified by a lack of
efficiency in properly conveying them. However, we are confident that there is no fundamental reason for such a discount. We
believe Rossi is a leading, competitive, capitalized and healthy company, with no solvency concerns or any material issue that
provides a fundamental basis for the paper to be trading at current levels. Additionally, the management is aware of this situation
and seems to be focused on improving communications with the market.
Notwithstanding Rossi’s communication deficiency, we believe it is unduly undervalued, currently trading at 0.53 P/BVadj (47%
below the level of its peers) and 0.56x LV (33% below its peers). The net present value from projects launched before 2009
(which will be cashed in before 2011), minus the debt obligations, is still 38% higher than Rossi’s market cap, which we see as
too strong a punishment for not communicating effectively.
We believe that, following the current rally, the sector has come back to the spotlight. Therefore, investors should become more
prone to take into account fundamentals, and such a degenerated discount to peers (and to the value of assets the company
owns) should narrow.
26
Equity Research
Company Profile
Rossi Residencial is among the three largest residential homebuilders in Brazil, operating with a highly vertical integrated
homebuilding business model, both as a developer and contractor, and with a dispersed geographical distribution. Established
in 1961, with a focus on the residential development since 1980, Rossi is one of the largest and most diversified (geographically
and by income segment) companies in the sector.
Investments Positives
Leading operator in Brazilian housing market. The company is considered one of the best operators in the mid-income
segment.
An R$150mn rights issue sponsored by the controller in late 2008, combined with a reduction in launches in the same
year, has left the company in a comfortable cash position. It has a Debt/Equity of 0.46x.
No challenging obligations in the short term: we do not see the need for any additional capitalization to keep the current
level of launches. Rossi has a cash position of R$303mn and receivables from sold units of R$3bn (32% for 2009). We
estimate short-term construction obligations of R$940mn, with relief to come from construction funding (whose terms
were defined with banks before projects were launched).
Risks and Concerns

Negative track record of communication with the market.
The company also has lagged its peers on the operating side, with mediocre sales speeds and margins; a lot can be
explained by the decision to keep launches pace in 4Q08 when sales speeds were already slowing down.
Valuation
Our R$13.0/share 12-month price target is derived through our DCF model in which we discount Rossi's cash flows up to 2017,
with a Cost of Equity of 17.0% (in US$ nominal, 15% real) and 2% perpetuity growth (in US$ nominal, 0% real).
section “Valuation 100 – Dividing to Conquer” in our industry piece titled “Brazilian Housing Developers: Fell and then Rose
Sharply on Sentiment – Time to Look at Fundamentals.”
Key Assumptions
As for the present value of future project (PVFP), we adopted very conservative assumptions for growth (-27% launches gr YoY
in 2009, zero growth after that), combined with parameters for a typical launch that come down to NPVe of 0.125x (see
assumptions below).
40%
Launches 21%
2008A 2,045 20%
25%
7% 6%
2009E 1,500
CAGR 09-12 0.0% -4% 10%
0% -8%
Perpetuity Growth 0.0% 1st Half 2nd Half 3rd Half 4th Half 5th Half 6th Half 7th Half
-9%
Ke (US$ nominal) 17% -11%
-20%
PVLP** (R$m) 1,357
-23%
**Present Value of Launched Project -40% -33%
27
Equity Research
Figure 3: Typical Launch Parameters

Taxes 6.8%
Sales Expenses 5.5%
NPVe 0.125x

Sales Speed 60% 20% 20% 0%
Cash flow* -112.7 74.9 99.4 149.2

% of PSV** -11.3% 7.5% 9.9% 14.9%
These parameters are based in the profile of Rossi's typical project, we assume a gross margin at project level of 34.6% (in line
peers' average) and a sales speed (duration) of 14.6 months (versus peers' average of 12 months) that reflects Rossi's
exposure to mid income segment. It is worth mentioning that these parameters are somewhat stable across each income
segment.

US$, zero in real terms), we reach an equity value of R$2.16bn (TP Spot of R$11/Share, 12m of R$13/share). Please find below
the valuation breakdown, main metrics and multiples, along with our forecasts for Income Statement and Balance Sheet.

Equity (R$m) 2,500
L: Legacy Projects 1,357 Market Cap Line ---------
L2 Units Launched and not sold 644 2,000
L3. (-) Net Debt + Other Assets NPV (575) 804
F: Future Projects 612
(R$ millions)
F1. New Launches NPV 1,437 1,500
F2. G&A Burden (634)

F3. Landbank Burden (190) 2,161
1,000
984
Other Adjustments not captured on the SOTP 192 1,357
D: DCF Valuation (Full Model) 2,161 500
Difference % 8.9%
# of shares 191
TP Spot 11 0
Legacy NPV Future Projects Equity Target
TP 12m 13
28
Equity Research

(R$ Millions) 2008 2009E 2010E
Other Key Variables
Revenues 1,233 1,602 1,940
EBITDA 156.2 275.5 408.8
Margin 12.7% 17.2% 21.1%
Net Income Adj 119.6 229.1 330.3
Net Margin 9.7% 14.3% 17.0%
EPS 0.63 1.20 1.73
Multiples
P/LV 0.56 N/A N/A
P/BVAdj 0.53 0.50 0.48
P/E 8.2 4.3 3.0
EV/EBITDA 10.0 5.9 3.7
Source: Company reports, Barclays Capital

(R$ Millions) 2008 2009E 2010E
Net Revenue 1,233 1,602 1,940
(-) SG&A (274) (179) (158)
Financial Results (10) 46 47
(+) Other Adusts 1 (78) (86)
29
Equity Research

(R$ Millions) 2008 2009E 2010E
ASSETS
Inventories 1,008 989 1,079
Others 174 174 174
Others 36 36 36
Total Long Term Assets 945 1,011 997
PP&E 33 34 35
Deferred 4 3 2
TOTAL ASSETS 2,866 3,087 3,505
Liabilities
Debt 149 181 215
Others 132 147 160
Debt 729 882 1,047
Others 57 57 57
Total Long Term Liabilities 978 1,131 1,296
Minority Interests - - -
Others - - -
30
Consumer
Cyrela Brazil Realty SA (CYRE3.SA)
Premium Player on The High Income; How Hard Will it Be to Go Guilherme Vilazante Edoardo Biancheri
Down the Ladder? BBSA, Sao Paolo BBSA, Sao Paolo
+55 11 5509 3376 +55 11 5509 3348
New: 3-Underweight New: BRL 18.00

Cyr ela Br azil Realt y SA
30
2008 2009 2010 2011

24

18
EPS 1.03A NA 1.17E NA 2.30E NA 1.55E
12
6
Volum e
15M
5M
Source: LehmanLive
We are initiating coverage of Cyrela Brazil Realty SA with a 3-Underweight rating and a 12-month price target of R$18.0
(US$8.3). The company has been adopting a conservative stance towards growth, especially in the mid- and high-income
segments where it has a very strong track record. As for the affordable segment, notwithstanding the sizable growth potential
(and equally high pay-offs), and the energy the company is devoting to developing this business unit, trading down can prove to
be more challenging and time-consuming than the company and investors expect (please refer to the section “Government
Housing Package and the 3C’s approach,” in our industry note, “Brazilian Housing Developers: Fell and then Rose Sharply on
Sentiment — Time to Look at Fundamentals,” for discussion).
These factors, notwithstanding Cyrela’s sizable upside potential of 57%, could cause the company to lag its peers in growth;
remember that our price targets (not only for Cyrela, but also for the other housing companies on our coverage universe) are
based on zero growth in launches for now.
Despite the recent rally (+129% from bottom in November 2008, vs. +48% Ibov), we believe that the valuation is not yet
reflecting any growth. We reach our target freezing the 2008 launch level until perpetuity and assuming zero growth after that;
we still find upside potential of 57% from current levels, whereas the average for our coverage universe is 93%.
Company Profile
Cyrela Brazil Realty is Brazil’s largest developer of residential properties. It has been in the business for the last 45 years,
during which time it has built a very strong brand name, holds an enviable leadership position and track record in the high- and
mid-income segments. It has operations in 17 different states and 55 different cities in Brazil as well as in Argentina. Lately,
Cyrela has been aggressively investing in the lower income segment, seeking to benefit from the government’s package.
31
Equity Research
Experienced management with a proven track record.
Highest liquidity play in the sector: one of only two names in the sector (along with Gafisa) with average daily trading
volume above $25 million.
Cyrela is entering the low-income segment through its subsidiary “Living”, a potential new source of revenue and
earnings.
Risks and Concerns

A possible effect of management’s priority of preserving capital over making investments in the current credit
environment would be lagging competitors in a pick-up economy.
Cyrela’s lack of track record in the affordable segment — makes it important to monitor management execution.
Valuation
Our R$18.0 per share 12-month price target is derived through our discounted cash flow (DCF) model in which we discount
Cyrela’s cash flows up to 2017 with a cost of equity of 16.0% (in US$ nominal, 14% real) and 2% perpetuity growth (in US$
nominal, 0% real).
assumptions that underpin each valuation part. For more details about our methodology, please refer to “Valuation 101 –
Dividing to Conquer” in our industry note titled “Fell and Then Rose Sharply on Sentiment — Time to Look at Fundamentals.”
Key Assumptions
As for the present value of future projects (PVFP) we adopted assumptions for growth which we consider very conservative (1%
decrease in launches year-over-year in 2009, zero growth after that), combined with parameters for a typical launch that come
down to NPVe of 0.160x (see assumptions below).
40%
Launches 25%
2008A 3,324 20%

10%
27%
2009E 3,294 5%
CAGR 09-12 4.8% -5% 12%

0% -9%
Perpetuity Growth 0.0% 1st-3%
Half 2nd Half 3rd Half 4th Half 5th Half 6th Half 7th Half
-7%
-20%
PVLP** (R$m) 2,252 -19%
-23%
32
Equity Research
Figure 3: Typical Launch Parameter

Taxes 6.8%
Sales Expenses 5.5%
NPVe 0.160x

Sales Speed 60% 20% 20% 0%
Cash flow* -66.6 19.1 144.7 149.2

% of PSV** -6.7% 1.9% 14.5% 14.9%
These parameters are based on the profile of Cyrela's typical project; we assume a gross margin at project level of 36.7%
(versus peers' average of 34.6%) and an average sales speed (duration) of 14.5 months (versus peers' average of 12 months)
that reflects Cyrela's exposure to high- and mid-high income segments. It is worth mentioning that these parameters are
somewhat stable across each income segment.
Price Target Derivation and Forecasts

As a consequence of the parameters stated above, with a cost of equity of 16% (in US$) and a growth in perpetuity of 2% (in
US$, zero in real terms), we reach an equity value of R$5.57bn (TP Spot of R$16/share, 18m of R$18/share). Please find below
the valuation breakdown, main metrics, and multiples, along with our model Income Statement and Balance Sheet.

Equity (R$m) 6,000
L: Legacy Projects 2,252 Market Cap Line -----
L1 Sold Units NPV 2,557 ---
5,000
L3. (-) Net Debt + Other Assets NPV (1,161)
F: Future Projects 2,814 4,000 3,320
(R$ millions)
F1. New Launches NPV 4,091 4091

F2. G&A Burden (1,362) 3,000
5,571
F3. Landbank Burden 85
S: Sum of the Parts Valuation (S+F) 5,065 2,000
Other Adjustments not captured on the SOTP 506
2,252
Difference % 9.1%
# of shares 356
0
TP Spot 16 Legacy NPV Future Projects Equity Target
TP 12m 18
33
Equity Research

(R$ Millions) 2008 2009E 2010E
Other Key Variables
Revenues 2,667 3,400 4,669
EBITDA 486.7 590.2 944.8
Margin 18.2% 17.4% 20.2%
Net Income Adj 366.5 417.4 818.3
Net Margin 13.7% 12.3% 17.5%
EPS 1.03 1.17 2.30
Multiples
P/LV 0.74 N/A N/A
P/BVAdj 1.13 0.98 0.88
P/E 11.2 9.8 5.0
EV/EBITDA 11.0 6.9 4.9

(R$ Millions) 2008 2009E 2010E
Net Revenue 2,667 3,400 4,669
(-) Cost of Sold Units (1,596) (2,357) (3,159)
Gross Profit 1,071 1,043 1,509
(-) SG&A (518) (266) (294)
Operating Profit 553 776 1,215
Financial Results (9) 150 207
Net Income (reported) 366 717 1,112
(+) Other Adusts - (300) (294)
34
Equity Research

(R$ Millions) 2008 2009E 2010E
ASSETS
Cash and near cash 824 2,393 2,158
Accounts receivable from clients 1,714 1,586 2,745
Inventories 2,926 2,608 2,594
Others 249 249 249
Accounts receivable from clients 947 876 1,517
Others 492 492 492
Total Long Term Assets 1,439 1,368 2,009
PP&E 99 101 103
Deferred 17 14 10
TOTAL ASSETS 7,558 8,609 10,157
Liabilities
Debt 206 239 272
Others 2,287 2,376 2,480
Total Current Liabilities 2,929 2,957 3,095
Debt 1,862 2,156 2,457
Others 230 230 230
Total Long Term Liabilities 2,219 2,513 2,813
Others - - -
35
Consumer
Gafisa SA (GFSA3.SA)
Burdened and Fueled by Tenda Acquisition Guilherme Vilazante Edoardo Biancheri
+55 11 5509 3376 +55 11 5509 3348
New: 3-Underweight New: BRL 28.0

Gafi sa SA
35 2008 2009 2010 2011

25
EPS 1.15A NA 0.96E NA 2.13E NA 3.56E

15

5
Volum e
6M
4M
2M
0
Source: LehmanLive
We are initiating coverage of Gafisa with a 3-Underweight rating and a 12-month TP of R$28.0 (US$ 13.8), implying upside
potential of 89%. Despite its attractive valuation (the stock is trading at P/BVadj of 0.81 and a P/LV of 0.56), we believe short-
term liquidity concerns will likely weigh on stock performance. The acquisition of Tenda in 2008 (which we regard as a rare
opportunity) has brought operating volatility and hefty short-term construction obligations to finish Tenda’s projects already
launched.
Again, this potential upside assumes very conservative assumptions, including zero growth, and thus any newsflow or action
towards improving its levered capital structure, such as a sizable receivables securitization or any sort of capital raising that
does not involve stock holder dilution, could lead to a considerable rebound in the stock’s price. However, we prefer not to rate
this stock differently until the company clarifies the way out for its short-term liquidity position, as we believe this
could weigh on the stock’s performance.
On the positive side, we believe the company has strong asset support for valuation (NPV of ongoing projects accounts for
116% of the current market cap) and it achieved a competitive edge on the low-income segment through the Tenda acquisition.
This could eventually come down to value. This recent acquisition had an impact on Gafisa’s short-term liquidity position,
which we believe could cause the stock to underperform its peers during the next few months. For the sake of
conservatism and in line with the assumptions adopted for Gafisa’s peers, we did not incorporate any growth in our analysis,
regardless of the material probability of this occurring in the future given Tenda’s strong brand and a distinctive distribution chain
in the affordable segment.
However, differently from MRV, Tenda currently subcontracts roughly all the construction, letting go sizable gains that scale and
procurement should entail. We believe there is still a lot of work to do on the execution side in order to achieve full advantage
from this recent acquisition.
36
Equity Research
Company Profile
Gafisa, the second largest company in the sector, is a diversified player with a wide geographical distribution. Through its
subsidiary Fit Residencial and its recent acquisition of Tenda, Gafisa has been paving the way to become one of Brazil’s main
players in the low-income segment. However, this recent acquisition placed the company in a challenging cash situation with a
non-optimal capital structure (debt/equity ratio of 0.8 and 200 million of debt maturing within the next year).
Strong asset support for valuation, 44% discount to liquidation value.
High liquidity (ADTV above R$25m in Brazilian market). Gafisa is the only company in the sector that trades through
ADR.
Exposure to low-income segment through Tenda, one of the largest low-income operators with a presence in smaller
cities, strong brand and wide distribution chain.
Risks and Concerns

Tenda’s acquisition in 2008 has impacted Gafisa’s short-term liquidity position, thus potentially raising the risk of a
dilutive rights issue. In 2009 Gafisa has R$492mn of debt to amortize and short-term construction obligations that exceed
R$1.2 billion (according to our estimates), against a cash position of R$606mn (part of it in project’s SPEs). If Gafisa
raises its net debt by R$340mn from 4Q08 levels, it could breach the leverage covenant (Net Debt Adjusted/Equity less
than 0.75x, currently at 0.60x). Thereby, we believe the company may depend on securitizing its receivables in a timely
manner in order to address potential liquidity concerns.
Lack of cash can undermine the company’s ability to invest, grow and dully take advantage of Tenda’s edge on the low-
income segment.
It posted disappointing margins and sales speed last year (among the worst within the sector on both metrics), a trend
that worsened after Tenda’s acquisition (Tenda has a fairly high level of units launched and not sold, which contributed to
bringing theses metrics further down).
Valuation
Our R$28.0/share 12-month price target is derived through our DCF model in which we discount Gafisa’s cash flows up to 2017
with a cost of equity of 17.0% (in US$ nominal, 15% real) and 2% perpetuity growth (in US$ nominal, 0% real).
section “Valuation 100 – Dividing to Conquer” in our industry piece titled “Brazilian Housing Developers: Fell and then Rose
Sharply on Sentiment – Time to Look at Fundamentals.”
Key Assumptions
As for the present value of future project (PVFP), we adopted very conservative assumptions for growth (-10% launches growth
YoY in 2009, zero growth after that), combined with parameters for a typical launch that come down to NPVe of 0.125x (see
assumptions below).
40%
Launches 21%
21%
2008A 3,040 20%
23% 23%
2009E 2,750 5%
CAGR 09-12 4.4% -3%

0%
Perpetuity Growth 0.0% 1st-1%
Half 2nd Half
-11%
3rd Half 4th Half 5th Half 6th Half 7th Half
-6%
-20%
PVLP** (R$m) 2,285 -19%
-22%
37
Equity Research
Figure 3: Estimates and Valuation Ratio

Taxes 6.8%
Sales Expenses 5.5%
NPVe 0.125x

Sales Speed 70% 18% 12% 0%
Cash flow* -58.3 24.4 239.0 0.0

% of PSV** -5.8% 2.4% 23.9% 0.0%
These parameters are based on the profile of Gafisa's typical project; we assume a gross margin at project level of 32.5%
(versus peers' average of 34.6%) and a sales speed (duration) of 11.4 months (versus peers' average of 12 months) that reflects
Gafisa's increasing exposure to the low-income segment. It is worth mentioning that these parameters are somewhat stable
across each income segment.

US$, zero in real terms), we reach an equity value of R$3.48bn (TP Spot of R$26/share, 12m of R$28/share). Please find below
the valuation breakdown, main metrics and multiples along with our forecast for Income Statement and Balance Sheet.

Equity (R$m) 4,000 Market Cap Line --------
L: Legacy Projects 2,285
L2 Units Launched and not sold 1,129
L3. (-) Net Debt + Other Assets NPV (1,247) 3,000
1,024
(R$ millions)

F2. G&A Burden (1,069) 2,000
F3. Landbank Burden (13) 1962 3,308
Other Adjustments not captured on the SOTP (111) 2,285
1,000
D: DCF Valuation (Full Model) 3,308
Difference % -3.3%
# of shares 133
TP Spot 25 0
TP 12m 28 Legacy NPV Future Projects Equity Target
38
Equity Research

(R$ Millions) 2008 2009E 2010E
Other Key Variables
Revenues 1,753 2,409 3,386
EBITDA 185.3 255.6 437.4
Margin 10.6% 10.6% 12.9%
Net Income Adj 151.9 127.3 282.2
Net Margin 8.7% 5.3% 8.3%
EPS 1.15 0.96 2.13
Multiples
P/LV 0.81 N/A N/A
P/BVAdj 0.81 0.73 0.68
P/E 12.9 15.4 7.0
EV/EBITDA 17.3 10.5 4.1

(R$ Millions) 2008 2009E 2010E
Net Revenue 1,753 2,409 3,386
(-) Cost of Sold Units (1,223) (1,729) (2,463)
(-) SG&A (323) (286) (279)
(+) Other Adusts - (99) (207)
39
Equity Research

(R$ Millions) 2008 2009E 2010E
ASSETS
Cash and near cash 606 1,149 2,236
Accounts receivable from clients 1,255 1,266 1,223
Inventories 2,029 1,807 1,580
Others 221 221 221
Others 281 281 281
Total Long Term Assets 1,145 1,128 992
PP&E 50 51 52
Deferred 18 18 18
TOTAL ASSETS 5,539 5,856 6,537
Liabilities
Debt 509 513 573
Others 565 602 630
Total Current Liabilities 1,326 1,344 1,428
Debt 1,343 1,353 1,509
Others 367 367 367
Total Long Term Liabilities 1,941 1,950 2,107
Deferred Income 188 188 188
Others - - -
40
Equity Research
Analyst Certification:
I, Guilherme Vilazante, hereby certify that (1) the views expressed in this research report accurately reflect my personal views about any or all
of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly
related to the specific recommendations or views expressed in this research report.
Important Disclosures:
Cyrela Brazil Realty SA (CYRE3.SA) (15 Apr 2009) BRL 11.50
33
30
27
24
21
18
15
12
Jul- 06 Oct- 06 Jan- 07 Apr- 07 Jul- 07 Oct- 07 Jan- 08 Apr- 08 Jul- 08 Oct- 08 Jan- 09 Apr- 09
Closing Price c Price Target

y Recommendation Change ² Drop Coverage
Date Price Rating Price Target Date Price Rating Price Target
Barclays Capital and/or an affiliate trade regularly in the shares of Cyrela Brazil Realty SA.
Our R$18.0/share 12-month price target is derived through our DCF model in which we discount Cyrela's cash flows up to 2017
with a Cost of Equity of 16.0% (in US$ nominal, 14% real) and 2% perpetuity growth (in US$ nominal, 0% real ). This price
target translates into 2009E EV/EBITDA of 10.7 EBITDA of R$ 590.2mn and P/E of 15.1x applied to 2009 EPS of R$1.17.
Risks Which May Impede the Achievement of the Price Target
Key industry risks for investors include a high degree of sensitivity to the Brazilian macroeconomy, which could adversly affect
economic growth, overall credit availability, delinquency rates, and consumer confidence. Company-specific downside risks
include management's ability to execute its growth strategy, margin pressures stemming from stiffening competition, and
construction costs or land price escalation.
41
Equity Research
Gafisa SA (GFSA3.SA) (15 Apr 2009) BRL 14.80
40
35
30
25
20
15
10

Barclays Capital and/or an affiliate trade regularly in the shares of Gafisa SA.
Gafisa: Our R$28.0/share 12-month price target is derived through our DCF model in which we discount Gafisa’s cash flows up
to 2017 with a cost of equity of 17.0% (in US$ nominal, 15% real) and 2% perpetuity growth (in US$ nominal, 0% real). This
price target translates into 2009E EV/EBITDA of 18.3x EBITDA of R$ 256.2 mn and P/E of 29.0 applied to 2009 EPS of R$ 0.96.
Key industry risks for investors include a high degree of sensitivity to the Brazilian macro economy which could negatively affect
42
Equity Research
MRV Engenharia e Participacoes SA (MRVE3.SA) (15 Apr 2009) BRL 16.90
45
40
35
30
25
20
15
10
Aug- 07Sep- 07Oct- 07Nov- 07Dec- 07Jan- 08Feb- 08Mar- 08Apr- 08May- 08Jun- 08Jul- 08Aug- 08Sep- 08Oct- 08Nov- 08Dec- 08Jan- 09Feb- 09
Mar- 09Apr- 09

Barclays Capital and/or an affiliate trade regularly in the shares of MRV Engenharia e Participacoes SA.
Our R$30.0/share 12-month price target is derived through our DCF model in which we discount MRV's cash flows up to 2017
with a Cost of Equity of 16.0% (in US$ nominal, 14% real) and 2% perpetuity growth (in US$ nominal, 0% real ). This price
Key industry risks for investors include a high degree of sensitivity to Brazilian macroeconomic that could adversily affect:
economic growth, overall credit availability, delinquency and consumer confidence. Company-specific downside risks include
management's ability to execute its growth strategy, margin pressures stemming from stiffening competition and construction
costs or land price escalation.
43
Equity Research
PDG Realty SA Empreendimentos e Participacoes (PDGR3.SA) (15 Apr 2009) BRL 15.50
30
27
24
21
18
15
12
Mar- 07 May- 07 Jul- 07 Sep- 07 Nov- 07 Jan- 08 Mar- 08 May- 08 Jul- 08 Sep- 08 Nov- 08 Jan- 09 Mar- 09

Barclays Capital and/or an affiliate trade regularly in the shares of PDG Realty SA Empreendimentos e Participacoes.
Our R$25.0/share 12-month price target is derived through our DCF model in which we discount PDG's cash flows up to 2017
with a Cost of Equity of 16.0% (in US$ nominal, 14% real) and 2% perpetuity growth (in US$ nominal, 0% real). This price
target translates into 2009E EV/EBITDA of 7.7x EBITDA of R$ 602.0mn and P/E of 7.5x applied to 2009 EPS of R$2.95.
Key industry risks for investors include a high degree of sensitivity to the Brazilian macroeconomy which could negatively affect
44
Equity Research
Rossi Residencial SA (RSID3.SA) (15 Apr 2009) BRL 5.16
35
30
25
20
15
10

Barclays Capital and/or an affiliate trade regularly in the shares of Rossi Residencial SA.
Rossi: Our R$13.0/share 12-month price target is derived through our DCF model in which we discount Rossi's cash flows up to
Key industry risks for investors include a high degree of sensitivity to the Brazilian macroeconomy, which could adversely affect:
include management's ability to execute its growth strategy, margin pressures stemming from stiffening competition and
45
Equity Research
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46
Equity Research
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April 17, 2009 Equity Research

Initiating on the Brazilian housing sector blue-chips

…and Cyrela and Gafisa as 3-Underweight

Figure 1: Company comparison

Source: Barclays Capital Research

Government Housing Package and the 3Cs approach

A few words about the Government Housing Package

Figure 2: Minimum Wage Pyramid (million households)

Source: Barclays Capital Research

Source: Barclays Capital Research Source: Barclays Capital Research

Capacity (Execution Capacity) – How hard will it be to trade down?

Valuation 101 – Dividing to Conquer

Valuation 101 – Dividing to conquer

Step I: Calculating the PVLP (Present Value of Legacy Projects)

Figure 3: Present Value of Legacy Projects (PDG Example)

Market value of Earnings release: extracted from the Accounts

Source: Barclays Capital Research

Figure 4: Typical Launch Parameters (for PDG)

Margin Assumptions (%VGV)

Year 1 Year 2 Year 3 Year 4+

Cash flow* -139.9 285.3 46.3 0.0

Source: Barclays Capital

Figure 5: PDG’s Sum of The Parts Model (SOTP)

Source: Barclays Capital Research

Figure 6: SOTP vs. Full DCF

R$ millions MRV RSID GFSA CYRE

Multiples and Accounting Principles

Moving from earnings multiples to net-worth multiples

Figure 7: GAAP Sensibility Table

R$ millions Current IFRS Sales Based

Source: Barclays Capital Research

Net Worth Multiples (P/Liquidation Value, P/Adjusted BV and P/BV)

Figure 8: Liquidation Value Breakdown (R$ millions)

Cyrela Gafisa MRV PDG Rossi

What can go wrong?

1. Banks could exit the projects they are sponsoring

Ac crued Cas h F low Acc rued Cas h Flw o Ex-Debt

Source: Barclays Capital Research

Return of Units (discretionary sales cancellations)

Stock Overview Chart EPS (BRL)

EPS 1.71A NA 3.94E NA 4.71E NA 3.10E

Source: Barclays Capital Estimates

Risks and Concerns

Ke (US$ nominal) 16% -25% -25%

PVLP** (R$m) 1,618 -40%

*Expected Net Present Value

Source: Barclays Capital Research Source: Barclays Capital Research

Figure 3: Typical Launch Parameter

Margin Assumptions (%VGV)

Year 1 Year 2 Year 3 Year 4+

Cash flow* -248.5 405.8 83.9 0.0

Source: Barclays Capital Research

Price Target Derivation and Forecasts

Figure 4: Where Value Comes From? Figure 5: Valuation Breakdown

F: Future Projects 2,101 1,944

Source: Barclays Capital Research Source: Barclays Capital Research

Figure 6: Estimates and Valuation Ratios

Source: Barclays Capital Research

Figure 7: Income Statement

Source: Barclays Capital Research

Figure 8: Balance Sheet

Source: Barclays Capital Research

Stock Overview Chart EPS (BRL)